Refresher: Importance of Getting a Valuation.

Refresher: Importance of Getting a Valuation

It’s been a while since we last discussed the various reasons to get a valuation, so we wanted to kick things back off by revisiting the benefits of a valuation. Obtaining a third party valuation has many benefits such as setting realistic expectations, uncovering elements of risk, settling disputes over value and much more. Knowing the value of a business is also one of the first steps you should take before you sell, and ideally should be done well in advance to give you the opportunity to fix problems hurting its fair market value.

Outlined below are some of the most sought after reasons for obtaining an independent valuation on a one time or annual basis:

Accountability and Performance: A business valuation can uncover how value is created, increased, or diminished based on strategies that management puts in place. A yearly valuation can help keep a company on track to meet or exceed its goals.

Acquisition in need of Financing: Companies in need of lending will find lenders much more willing to work with business owners who understand the value of their business. A valuation lets lenders and outside parties know the current value of their investments. Did you know that lending regulations from the SBA (SOP 50-10) require third party business valuations if certain criteria are met? Every SBA-guaranteed business acquisition loan over $350,000 must be supported by an independent appraisal performed by a “qualified source;” an individual who regularly receives compensation for business valuations and is accredited by a recognized organization.

Taxable Events: For estate, gift and all other income tax matters the IRS requires an independent valuation be performed at the Fair Market Value standard. Many business owners choose to gift shares of stock to their heirs as a means to minimize or avoid estate taxes. Minority interests often are valued at a substantial discount compared to the business as a whole. Thus, not planning ahead by taking advantage of annual exclusions and exemptions can be extremely costly further down the road when the owner finally passes.

Estate Planning Purposes: With impending changes to estate tax law, business owners must reassess the value of their business to understand how the new laws will impact their estates. Previous insurance policies and estate planning may no longer cover the potential tax consequences.

Buy-sell Agreement: An annual valuation helps set a standard for the value of your company’s shares for buy-sell agreements.

Internal communication: This is an opportunity to let management and key employees see how they are impacting the value of the company. Many companies tie bonus and compensation to overall company value.

Investment Options: A periodic valuation can enable your company to use shares and equity as currency in the merger or sale of another company.